Just this spring, the sale of recreational cannabis began in New Jersey after becoming the 18th state in the nation to make it legal. The growing disconnect between state legality and federal illegality has left many businesses with uncertainty. This disconnect affects virtually every aspect of the cannabis industry – from banking and capital markets, to real estate and more.
Join members of our Cannabis Industry Team, recognized by Law360 for two consecutive years as a Cannabis Practice Group of the Year, for a discussion highlighting some of the major issues and trends currently at play, including:
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The federal cannabis policy
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The impact of federal policy on cannabis operations in states where cannabis is legal
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The efforts and likelihood of federal legislation that would legalize cannabis
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Policy, safety, and oversight opportunities that could be gained by federal legalization
To view this webinar, click here.
Transcript
Jeremy Garvey:
Good afternoon, everyone. My name is Jeremy Garvey. I'm a member of the Corporate Practice Group here at Cozen O'Connor in the Pittsburgh office. It's my pleasure to bring back to you the Cozen O'Connor Corporate COffee Break. We took a little bit of a pause with COVID on these events, but just as a reminder, the Cozen O'Connor Corporate COffee Break as a series is to present quick informative and consumable programs on relevant corporate topics to our friends and to our clients. The format we've chosen is a quick-hitting Q&A for a half an hour and a discussion, so we hope that it is consumable. The idea is to get folks up to speed quickly in an understandable way.
Jeremy Garvey:
Before I get into the intros – and I'm very excited to have my two guests today. I have a few housekeeping items to review with you. All of the participants will be in listen-only mode. I hope that means you can hear and see us, and we cannot hear or see you. If you would like to submit a question, there is the Q&A chat pod at the bottom. You will submit those questions and they will come to us. Hopefully, if we have time, we'll try to respond to those. What we've done in the past, if we can't get to you, we’ll endeavor to reach out to you by email, and have either Joe or Patrick or someone here connect up with you to try to get your question answered.
Jeremy Garvey:
Again, I couldn't be more pleased to have these two folks and talk about this topic. It's really outstanding and timely. The headline is “The Clash Between State and Federal Law in the Cannabis Industry: Where We Are, Where We're Going, and What Lies Ahead.” What we're trying to get at, and we believe that most folks obviously get this – it's the disconnect between state legality and federal illegality. It's very unique to this industry and it has created a great deal of risk and uncertainty at many levels.
Jeremy Garvey:
Now to my two colleagues and our guests. Our guests today are Joe Bedwick, who is also a member of the Cozen O'Connor Corporate Group and is the chair of the Cozen O’Connor Cannabis Industry Team and is a former hiring partner of the Firm. Joe has extensive deal-making and counseling credentials in the cannabis and related spaces. Joe is seen as one of the go-to lawyers in the country in the cannabis space and has been recognized by Chambers USA for cannabis law. Joe has also led Cozen O'Connor's Cannabis Industry Team that has been several times recognized by Law360 as a Cannabis Practice Group of the Year.
Jeremy Garvey:
I'm also equally excited to have my colleague Patrick Martin, who is a managing director of Cozen O'Connor Public Strategies, as a guest. Patrick is a national government relations and public affairs strategist and is based in the firm's Chicago and D.C. offices. His practice focuses on advising highly regulated companies in health care, energy, financial services, retail, transportation, obviously cannabis, and higher education and others. He advocates for his clients and our clients before Congress, the White House, federal agencies, state and local governments, and Patrick and our public strategies team represent some of the largest players in the cannabis and hemp space, and his knowledge of the public policy and state of play in this space is unparalleled.
Jeremy Garvey:
So, gentlemen, welcome and thank you. We’ll try to keep it tight and keep it moving and keep it lively.
Jeremy Garvey:
Joe, from my perspective, let's get right to it. Our topic is the intersection and the incongruity of cannabis laws between the federal and the state construct. I know it's complicated. It's easy to say, right? It is legal or decriminalized in many states and it is federally illegal, but I know I'm wrong. I know I'm oversimplifying it. So can you and Patrick weigh in – level set for us? What is the current state of play? And tell me why it isn't as easy as federally illegal, state-wise legal.
Joe Bedwick:
Sure, Jeremy. Thank you, Jeremy, for that ridiculously kind introduction. And welcome, everybody. Thanks for joining us. It is one of the most complicated industries that we've seen, and you know, our title is “The Clash Between State and Federal Law in the Cannabis Industry,” and maybe the best way to describe it is how Justice Clarence Thomas described the federal cannabis policy. He described it about a year ago as a half-in-half-out approach by the federal government, which simultaneously tolerates and forbids cannabis use at a local and state level. And so that creates that disconnect between an industry that is federally illegal but legal and/or decriminalized in 48 states in the country, including the District of Columbia.
Joe Bedwick:
It creates this disconnect that leads to disadvantages that cannabis companies incur and experience that are unlike any other industry. It creates a siloed approach within and among states. So each state has its own set of regulations that cannabis companies need to be aware of and comply with, and especially if these cannabis companies are multi-state operators, they need to be up to speed and compliant with the regulations in a number of states. And it creates regulatory hurdles and disadvantages across the industry that this disconnect between federal law and state law leads to. Patrick, what are your thoughts on that?
Patrick Martin:
Yeah. First of all, Jeremy, thank you so much for having us and for that kind intro as well. And, Joe, I think you've laid it out perfectly. The federal-state disconnect creates a situation where cannabis companies and ancillary businesses are forced to operate in a way that no other industry in the country is. I always, when we're talking about the federal-state disconnect, it's really hard to come up with something that is similar or reminds us of it. But I always point to, take it back 15, 20 years, you had federal law, the Defense of Marriage Act that defined marriage as between a man and a woman, and then you also simultaneously had states beginning to legalize civil unions and gay marriage across the country. And you had a federal-state disconnect that in some ways resembles the one we have right now. What ultimately resolved it was the United States Supreme Court weighing in, in a historic case, and essentially bailing federal policymakers out from having to grapple with that disconnect. I always say, we now sort of assume, or we in some ways take for granted, the fact that same-sex marriage is legal across the country. Had the Supreme Court not taken that case up, and federal policymakers been forced to define marriage or to come up with some construct, it could have easily taken another 10, 15 years. We may still be debating it right now. And you could have seen all 50 states legalize civil unions and gay marriage across the country – maybe not all 50 but certainly a majority of them. The little lesson of that I think is that federal policymakers tend to follow public opinion at a very, very slow pace and they are naturally sort of not inclined to address very complicated issues. And so, unless the United States Supreme Court steps in and in some way, like Joe pointed out, addresses head-on this disconnect that Justice Thomas pointed out, I think you are going to continue to see a period of time here for the next several years where the federal and state laws just make absolutely no sense when considered together.
Joe Bedwick:
And that’s interesting, Patrick, because it seems, unlike the same-sex marriage issue, it seems at least to date the U. S. Supreme Court is unwilling to get involved. And everybody among the branches – everybody wants to punt it to the other. The Supreme Court is saying, “Well, you know what, we might not agree with it.” Justice Thomas said this is creating an untenable situation that is very difficult for a company that is operating legally within a state and who may think it is entitled to all of the protections that every other legal state industry is afforded – very difficult to understand that it is not entitled to those same protections. But where the U. S. Supreme Court is unwilling at least at this stage to get involved, Congress – at least one side of Congress – seems unwilling to entertain at all. That's a question that always fascinates me, and you and I have talked about this regularly. Like why is it taking so long to not just legalize cannabis, but some of the other lower-hanging fruit, which I know we're going get to – and, you know, whether it's a banking act or something. Is it as simple as what you said – that it's just the machinery of U.S. politics is just a slow-moving machine and it takes a while for Congress to catch up to public sentiment? Or is there something more beyond it?
Jeremy Garvey:
Patrick, I think that we'll get a little bit more into the granularity and into some of the specific initiatives around whether it's SAFE Banking or the MORE Act, but I guess to put you on the spot with the unfair of the unfair question, right – sort of when? I think folks are of the view that you had a change at the federal level with the Biden administration. It certainly looked like there was some momentum. Obviously, and we will get into the inefficiencies. But from your standpoint, when do you think this could happen? And I realize as it comes out of my mouth, it's a really stupid question.
Patrick Martin:
No, no. It's a great question. It's the question that all of us are trying to grapple with as we talk to our clients, investors, and everyone else. I think the best way is to kind of set the table for maybe where the expectations were a year and a half ago and kind of where we are now. So if you had told me without looking into the particulars that the 2020 election would produce a democratic president and democratic majorities in Congress, and that's all you had told me, I would have assumed that would mean at minimum sort of modest cannabis-related reform to address some of the problems in the state marketplaces, some of the problems with access to capital. That would have been very doable under that political dynamic. The problem is when you dig into it a little bit, it's a little more complicated; and frankly, as a public policy matter, it makes working on this issue very interesting because you have some odd coalitions and perspectives that transcend political party and a lot of other kinds of, you know, things we use to identify ourselves.
Patrick Martin:
In the Democratic primary in 2020, you had, I think 12 or 13 candidates. I think you had 12 official candidates, 11 of whom supported making cannabis legal federally. One did not, and that was President Biden, who ultimately became the nominee of the party and was elected president. His position on cannabis is outside of the mainstream of the Democratic Party as it's made up today, and you see this a lot with Democrats and Republicans, but it's more notable in the Democratic Party of elected officials of a certain age. We noticed that if you are over the age of 70, you are far less likely to support comprehensive legalization the way that many Democrats under the age of 70 do. Additionally, Republicans under the age of 40 are much more likely to be open to either federal legalization or some type of modest cannabis-related reform than Republicans over the age of 40. And it creates some kind of strange bedfellows in Congress. So you have that dynamic. You have a president who, frankly, like just to be completely sort of blunt and candid about it, does not like this issue. He isn't interested in it. It is not what motivates him politically at all. I think there's a feeling that he was able to survive the Democratic primary while having the position that he had, and he does not want to be the weed president. That's just not who he is. I think he has some very old school views and some experiences that he's had personally with his family and addiction that have all created his view; and his administration's view right now is we're not dealing with this. We’ve got other stuff going on. We're managing the pandemic. We have wars overseas. We have inflation. We're dealing with all these different things. Cannabis just doesn't make the list. So you have that dynamic.
Jeremy Garvey:
That's super helpful. We did get a question and I'll try to weave it into where we're headed. I’ll paraphrase – and you touched on this, Patrick. The question speaks to a crunch, you know, facing the economy generally. You've got probably unprecedented inflation, or at least for most folks you've got a really challenging economic environment coming out of the pandemic, the supply chain, so there is pressure obviously on the industry and in commerce. Is there any perceived advantage for politicians to embrace or resist or ignore given those headwinds. And a little bit too, I'll throw in there, you've got the midterms. You've got conflict abroad. You do have a number of other issues which are pulling at folks. So do you see any thread that people can pull one way or the other to maybe move the timetable?
Patrick Martin:
Yes, definitely. And that's a great question and there's a few different factors there. So we started this and our webinar is titled “The Federal-State Disconnect.” So part of this is the federal and state policymaker disconnect too. Mayors, governors, state AGs, and a whole number of states –they see these economic factors and they think this is an industry we need to continue to do well. We need the tax revenue to continue to fill our local and state coffers. You have had an overwhelming number of governors weigh in with federal policymakers saying pass SAFE Banking. There is a real understanding from executives and communities and states across the country that this industry is real, it's happening. It provides good head of household jobs for their constituents and they want to see it do well and they want to address some of these problems. At the federal level, these economic factors have given some elected officials a little breathing room to say, “Hey, we got other stuff we're dealing with here” – and I was kind of alluding to that with the president. You hear this all the time. It gives people who don't really want to deal with this issue and address it a little room to say, “Listen, we’ve got the baby formula crisis, we've got all these different things. We'll get to cannabis at some point, but it's just not the top priority right now,” and so I think that's, unfortunately – you can kind of cut it both ways with some of these larger, macro things and how they're affecting the prospects for modest reform at minimum on this issue federally.
Jeremy Garvey:
So you mentioned the SAFE Banking Act, and, Joe, I know that this comes up all the time and we'll talk a little bit about the friction and the issues created because some of the federally regulated and mandated things are not really available to the industry but, Patrick, there's the SAFE Banking Act that comes up. You have the MORE Act, I guess that's the Marijuana Opportunity Reinvestment Expungement Act or something? You've got new Schumer, you've got all these folks who are pushing things forward and you get some traction in the house at times. Is there anything new there? Is there anything interesting? Is there something that's leading the way that could break free?
Patrick Martin:
I’ll give a real succinct description of where we are federally leading up to the midterm elections and then would love Joe's perspective on what he's hearing from industry. So you mentioned the MORE Act was the House’s attempt to address federal legalization. That passed the House. There is no appetite in the Senate to take up that bill for a variety of reasons. The Senate will be releasing their version of comprehensive legalization – this is the Cannabis Administration Opportunity Act – likely at the very end of June or right after the 4th of July recess, and that will be Leader Schumer, Chairman Wyden, and Senator Booker's version of comprehensive legalization – so the Senate’s version essentially of what the MORE Act tried to address. It will be comprehensive. It will look at federal legalization from all angles – financial, tax, and criminal justice. It will be comprehensive in nature and we may see a finance committee hearing on that bill this year, we may not. We'll have to see. That for all intents and purposes is the democratic majority in the Senate laying out what they think federal legalization should look like. That bill has absolutely 0% chance of passing the Senate with the 60 vote threshold it would need or becoming law. It just won't happen. This is really, for all intents and purposes, a messaging bill.
Patrick Martin:
On what can actually pass, which is the question everyone wants to know – clients, Wall Street. Everyone is sort of like, “What is possible before the end of the year, before the midterms, or in the lame duck, before there’s a new Congress?” And I think what is possible – you mentioned the SAFE Banking Act. It has passed the House a number of times. Typically, the House is the more ideological body and then the Senate is known as the saucer that cools the cup. It's a little more pragmatic. In this case, on this issue, the House has passed SAFE Banking a number of times and the Senate does not deem it sufficient to take up on its own based on the view that you also need to pair it with some type of criminal justice reform or some type of social equity provisions.
Patrick Martin:
What Leader Schumer is trying to figure out right now, and this has all come out in the last week or so – is there a small package of cannabis reforms that the Senate leadership could bundle together that would maintain the Republican support that we've seen for SAFE Banking? And so some of these things would be funding for access to veterans, some research components, very noncontroversial stuff that doesn't get into federal legalization. But some of the things that have been batted around that seem to make sense to a lot of democrats and republicans. If Leader Schumer feels like he can create a little package of cannabis-related provisions, I think he will try to put it on the floor for a vote if he has assurances that he has 10 republicans. And then if that passes, I think the House would pass that either before the election or in a lame-duck session. The question is, will he be able to maintain the republican support that SAFE Banking has seen on its own? And that's an open question. There's some math to be done there.
Jeremy Garvey:
Super helpful. Joe, Patrick touched upon banking, finance restrictions, real estate, taking security interest. PPP loans were not available. Obviously, you can't get an SBA Loan. There's questions of availing yourself of the court systems. Obviously, there's the tax issues on 280(e). Can you speak to some of the hurdles – I know there's quote-unquote some ways to maneuver through this – but can you speak a little bit to those types of frictions and restrictions and what you're seeing and how folks are trying to deal with it?
Joe Bedwick:
Sure. Well, you touched on a number of the hurdles, Jeremy, and you mentioned 280(e), a complicated tax code provision, but it's pretty simple in what it does and the harm it creates for cannabis companies. Cannabis companies, again, unlike any other industry in the country – cannabis companies are unable to take advantage of federal income tax deductions for ordinary and necessary business expenses. And what that does is it creates an effective tax rate for cannabis companies that could be in the 70, 80, 85% range and puts them at an extreme disadvantage. Cannabis companies are not able to access – I'm sure most, if not everybody on this webinar, understands that cannabis companies are not able to access the U.S. capital markets.
Joe Bedwick:
But then they may say, “Well, wait. I see there are cannabis companies that are listed on the New York Stock Exchange. How could that be?” And in a quirky aspect of our national federal policy right now, U.S. cannabis companies that do business in the United States need to go to Canada to access the capital markets. And you see that U.S. cannabis companies are listed on the Canadian Securities Exchange. However, cannabis companies that do business in Canada and not in the United States are able to list on the New York Stock Exchange because it is legal in Canada. It is legal in the home state. And so the access to capital is more difficult for cannabis companies.
Joe Bedwick:
And then you just talk about financing, and this dovetails in with SAFE Banking. The inability to go to a bank – and not even the biggest banks – but the inability to go to a bank and obtain a $25 million, $50 million, $100 million line of credit to run your business is crippling because what does that do? That forces cannabis companies who need financing to go to private lending groups. The interest rates are very, very high. They oftentimes need to secure these loans with all of their assets in the company even though the coverage ratios and the amount of the loan might not warrant that full collateralization, and it creates an industry again that is crippling to the cannabis companies from a financing perspective. Yes, it cripples MSOs, multi-state operators, but it's even more crippling in many ways to the single-state operators, the small companies, companies that have received their license award, and now think that they are able to take part in this huge industry and participate in the upside only to realize that, “Oh my god. I can't take the deductions. I can't operate my business the way I want. I'm having a very difficult time raising money. I have all of these regulations to comply with and the money that I need to spend to do so outweighs the benefits of having a license and operating in the industry.”
Patrick Martin:
And to Joe's point on that, just to really highlight how challenging this environment is. Imagine, in a number of states across the country, they have passed cannabis laws that are working very hard to not only look back at what now, in retrospect, was just a horrible, horrible situation where the war on drugs perpetuated racism and all these horrible things in communities of color across the country. These cannabis laws are trying to address that and be forward-looking and say, “Okay, we want you to now have, like Joe alluded to, a part in this new industry. We're going to set up these social equity licenses to try and help people who have been hurt by the war on drugs now benefit as this industry is becoming legal across the country.” They're looking at those economic challenges – from inability to access capital, get a loan – and what looked like a golden ticket is really now a real challenge. And that's sad – when you've had public policy decisions made to really help these people, and you have these broader federal problems that are making it impossible for them to start up businesses, hire employees, and ultimately make money in this new industry. That's just – that's really, really sad.
Jeremy Garvey:
Joe, we've got a couple of questions. We're probably not going to be able to knock those off, but just quickly because we’ve got maybe three minutes and the one thing I promise when I do these is to try to keep the trains moving on time. Can you maybe just touch on the FDA issues? I know it comes up and you see CBD and THC products being sold in different jurisdictions, and is that another area that's just ripe for somebody to rationalize it with some rules that could be helpful?
Joe Bedwick:
Well, totally. And you would think that the FDA regulates everything but it does not have regulations for products that contain CBD or THC. The misnomer, Jeremy, is that when Congress passed the Farm Bill in 2018, which legalized CBD, everybody thought, “This is great. CBD is now legal. I could put it in my products. I could put it in topicals. I could put it in beverages,” and the FDA said, “Wait a second. This is legal from a DEA perspective but we're the FDA and it is still illegal.” It is still currently illegal, notwithstanding the fact that you can go into businesses in California or Nevada or I can go across the street from my office here in Philadelphia and get a CBD ointment. The FDA’s approach is it is still illegal to put CBD products, THC in food and beverages. And the reason for that is because CBD, among others, CBD is a product that has been used in an approved drug by the FDA and products that are in approved drugs, it's not legal to put those products in food and beverages.
Joe Bedwick:
However, as you pointed out, the FDA does not have any regulations regulating that and that gets to the policy and safety opportunities. The proponents of FDA regulations are regulate this. Make it safe. Make it standard across the country so people who are taking these products know that the FDA is backing it and supporting it and regulating it. And the FDA has been hesitant to do so ostensibly, and, Patrick, I will be interested in the policy side of this, but ostensibly because they, “Don't have enough information yet on CBD and if it is safe or not – to be able to come up with regulations.” But it's a huge issue. The FDA and the lack of FDA regulations in this industry is a significant hurdle in the country.
Patrick Martin:
Yeah. And it's allowed for, now, a whole new sort of industry to pop up. Not a legal regulated industry, but I'm sure everyone on this webinar has read articles about Delta 8 and Delta 9 and hemp-derived CBD products that have low-grade THC in them that are now being sold over the counter all over the country. And that obviously was not the intention of federal policymakers when they passed the Farm Bill. And next year we're going to enter another Farm Bill cycle where we'll see based on the makeup of Congress next year if they address any of these issues. But it presents a real challenge. I spend every day with my colleagues at Cozen O’Connor Public Strategies talking to federal state policymakers about cannabis. Our biggest corporate clients, many of whom Joe and I share together, they say exactly what Joe alluded to: “We want to be regulated. We want a regulatory structure set up that will make sense and keep people safe.” But the longer policymakers just continue putting off addressing the hard questions, it's just going to make it so you have a black market that continues to grow and thrive and take advantage of the fact that we're not addressing this through public policy and government the way it should be.
Jeremy Garvey:
Patrick and Joe, thank you. We’re just a little bit over. I appreciate it. I think this could go on for quite some time. Look, I think you guys gave some great content and I really appreciate you taking the time. I do want to thank everyone for joining us today at the Cozen O'Connor Corporate COffee Break. There'll be an evaluation form at the end. If you could take the time, the feedback is always helpful. We'll use the input and refine it and we're trying to get better at these as we move forward. If we didn't get to your Q&A, and there's a couple, we will try to get somebody to reach out and see if we can get you a quick answer. So on behalf of everyone in the Corporate Practice and all my colleagues at Cozen O'Connor and Patrick and Joe, I want to thank you for joining us. Everyone, please stay safe and healthy and we look forward to seeing you all at the next coffee break. Thank you so much, guys.